CFM, of course, is the sole-source engine provider on the Boeing 737 and has about half the market share on the Airbus A320 family.

In the January 17 note, Bernstein looks at the after-market engine business of Safran, which is dominated by the CFM56. There are nearly 17,000 CFM 56 engines in service today, mostly what Bernstein calls the second generation.

Bernstein’s report illustrates what we have occasionally written: the importance of after-market parts sales and MRO (maintenance, repair and overhaul) is to the engine market.

We’ve noted previously that the after-market is more important than the sale price of the engine where there is competition for a power plant.

As we’ve previously noted, it is not unknown for engine makers to deeply discount engine prices even more than the airframers discount their airplanes. In the lawsuit between Pratt & Whitney and Rolls-Royce over patent claims for the engines powering the Airbus A380, court documents revealed discounts as steep at 80% or more.

It is also not unknown for engine makers to actually give the engines to the customer free in conjunction with an after-market and MRO contract. These services are where the profits truly are.

The Bernstein report takes a deep dive into crunching the numbers about the CFM contribution to Safran revenues and profits, calling the after-market “the most significant driver of Safran” growth for the next four years. Aerospace propulsion accounted for 52% of the revenue in 2010 and 68% of the profit. Commercial aircraft engines were 23% of the revenues.

The commercial engine after-market revenue are forecast to grow at a compounded annual rate of 12% over the next four years, Bernstein writes. The CFM is principally responsible for this. (Safran gains some revenue from GE’s large engines, but not much, Bernstein writes.)

After-market revenue growth will represent nearly 40% of the 4bn euro increase during the next four years, Bernstein says.

Even though the CFM 56 second generation engine now has a 10-year time-on-wing, Bernstein says this won’t depress after-market revenue growth because first generation engines have shorter lifetimes and the sheer volume of airplanes and CFM engines entering the market means a continuous growth and revenue stream.

We expected only the 737 order; we had previously reported NAS was one of the “commitments” for the MAX.

This represents the third all-Boeing customer Airbus has won for its NEO.

NEO deliveries will begin in 2016, equipped with the PW GTF. Engine selection for later deliveries remains open. The GTF enters service on NEO in 2015 and the NEO CFM Leap engine enters service a year later.

Boeing forecast 70-85 787/747 deliveries this year, with half (35-44) being 787s. This is will below Wall Street consensus, though David Strauss at UBS predicted 40. We find this a stunningly low number that doesn’t reflect well on either production ramp up or fixing the rework necessary for the more than three dozen 787s at Everett.

Boeing’s own Z24 production plan for this year had a production rate of 45 787s.

We are, as the Brits say, gobsmacked by this information. (Update, 0800 PST: In Q&A, McNerney says 787 deliveries affected by large number of change incorporation required.)

From the conference call:

Jim McNerney (JM)

Greg Smith, CFO (GS)

JM: Now at 2.5 rate on 787, going to 3.5 in 2Q, sticks with 10/mo late 2013. First non-change line number in mid-60s.

• First GEnx powered 787 delivery later this quarter.

GS: Will consider rates about 10/mo on 787.

• Majority of 787s delivered in 2012 will require change incorporation.
• Airplanes coming off 787 line in first half will require change incorporation; second half will go directly to customers.

JM: In 2011 Boeing improved on every financial metric.

JM: We’re confident in the amount of 787/747 projected deliveries. A little more than half of 787s will come out of change incorporation, rest straight off the line. A little more than half in work now.

GS: A lot of cash generated in 2012 is directly related to commercial delivery profile, including 787 and 747. Inventory will continue to grow but will taper off when hitting peak production on 787.

JM: A lot of our challenge has been change incorporation due to flight test discoveries. Rate ramp has stayed [consistent] last year, year-and-a-half. Engineering changes bigger affect on delivery rate than ramp rate. (Editor: see our previous post [linked above] on Z24 ramp up rate reduction, however.)

JM: Open items on 747-8F: production is going well. We have a pretty decent pipeline of airplanes we’re working now, most of which are decision-able for orders in 2012. The economic cycle has not been friendly to VLA. These freighters are very productive machines. We have a decent Intercontinental pipeline. On 767F, FDX was important for a very important customer and provides a nice bridge to tanker. Negotiating with other potential 767F customers. Linchpin was FDX. We’re in active discussions on the Atlas 748s. The flutter issue on 748 is not “out of bounds” on issues for new airplane and we will work through it.

JM: Orders will exceed book-to-bill with MAX commitment-to-order conversions. We also see robust orders in other product lines.

Airbus will be hit hard if Kingfisher Airlines of India fails. ATR has already lopped its entire order of turbo-props from its books due to Kingfisher’s financial travails.

Airbus is a wholly owned subsidiary of EADS and EADS owns half of ATR.

DVB Aviation Finance is planning to repossess two Airbus A320 family aircraft, if it hasn’t already, and some lessors are also taking back aircraft.

According to the Ascend data base, Kingfisher operates 31 A320 family with V2500 engines and 25 ATR-72-500s. It has 68 A320s and 38 ATR-72-600s on order. Kingfisher also has A330s, A350s and A380s on order and holds options for a variety of aircraft.

If Kingfisher were to cease operations, the 31 A320s hitting the market would likely depress values. These models are powered by the V2500 engine, which is generally considered harder to place in a remarketing situation, say lessors. Lease rates tend to be softer, as well, say lessors.

A Kingfisher liquidation would sting the A350 and A380 programs, though the airline holds only five firm orders for each, according to Ascend.

Kingfisher holds an order for 15 A330-200s, a loss of this order would free up some early delivery positions for this in-demand aircraft.

Source: Ascend Data Base

Lessors to Kingfisher

Source: Ascend Data Base

We’ve been involved in the airline business since 1979 and from 1990, when we co-owned Commercial Aviation Report (CAR), have followed the appraisal business. Given the discussion in “comments,” we think a dedicated post is worthwhile.

CAR created the industry’s first commercial appraisal conference in 1990. ISTAT–the International Society of Transport Aircraft Traders–at that time was still largely a small, professional organization, far difference than what it is today.

CAR’s first conference brought together nearly every appraisal company then in existence in the US to compare and discuss appraisals of what was called Enhanced Equipment Trust Certificates (EETCs) and appraisals published by the firms.

At the time, EETCs were a popular method of financing airplanes, particularly for the poorer US airlines. The theory was that several tranches (or levels) of funding “enhanced” the credit protection. The A tranche had the highest level of credit protection, followed by the B and C tranches. EETCs were typically structured at an aggregate 80% loan-to-value (LTV) and the credit rating agencies rated the EETCs on the basis of airline credit, the equipment type and equipment age of the airplanes covered by the EETCs.

In theory, the lenders then were well protected in the event of a default.

This was put to the test in 1991 following the Iraq invasion of Kuwait. But this is getting ahead of the story, so stand by.

The appraisers provided valuations for each of the aircraft contained within EETCs and three appraisers were hired to provide these. It was off these appraisals that the LTV was set.

In that 1990 CAR conference, we ran our own math and showed that appraisals in the sample EETCs selected for discussion varied by 25%-35%–a wide number, we believed that (to skip a lot of discussion) demonstrated that appraisals were as much art as science at the time (and, we believe, to this day). One of the appraisers opined that appraisals would be considered accurate if they were within 10% of each other.

The challenge, of course, is that each appraisal firm has its own methodology in creating appraisals. What was true then and what is true now is that the methodologies meant that some firms tended to put more generous than others. Typically these firms were hired by the airlines floating the EETCs because they wanted to get as much money out of them as possible.

This meant that for new airplane purchases, airlines typically had appraisals well in excess of their actual purchase prices so that the EETCs often funded 110%-125% of their actual purchase price.

For used airplanes, the valuations were also usually generous when it comes to EETCs.

How do appraisers come up with the valuations? There is a lot of detail to this, but on a macro level, they look at the list prices published by the airframe manufacturers (OEMs); they try–usually unsuccessfully–to get the OEMs to tell them some actual sales prices; and they go to their market sources for sales prices on new and used aircraft. Prices used to be included in FAA filings and Department of Transportation filings. The airlines and OEMs got DOT to withhold these prices as commercial sensitive, and when the industry tumbled that we at CAO were reading the FAA filings, getting the numbers and publishing them, the airlines and lessors objected and literally made a federal case out of it. The FAA published a rule-making case in the federal register and, although we put up a good fight (including American Airlines conflicting out our lawyer in the process), we knew we would lose and we did. The numbers were then redacted from all future FAA filings as commercially sensitive.

The absence of the numbers from the FAA and DOT made it all the more difficult for the appraisers to get good values in their research.

Then came the 1991 Gulf War, and ultimately 40% of the US airline capacity went into bankruptcy: Pan Am, Eastern, Continental, TWA, the first Midway Airlines, and several others. Continental and TWA were prolific users of EETCs, particular for older aircraft. All these bankruptcies put the “enhanced” theory to the test and it royally flunked. Aircraft values plunged so precipitously that the 80% LTVs were meaningless protections. The lenders who were supposed to have ample values were burned anyway.

The credit rating agencies over the years have stepped down the LTVs until today EETCs and similar instruments are more in the 50%-60% LTV range on valuations provided by appraisers.

So how do appraisers come up with values today? As noted above, they talk with the OEMs and the market. Airbus and Boeing hold appraiser seminars to discuss the values and virtues of their airplanes.

Over the years Boeing has been particularly effective at this. As we noted in the Rate 35 comment section, Boeing’s 737NG generally rates higher than the A320 in part because it typically has 12 more seats in airline service and it has one engine type to the A320′s two types. It is generally more difficult to place A320 V2500 engined airplanes than A320 CFM equipped aircraft, and lease rates for the V2500 aircraft typically are (today) $60,000-$70,000 less than CFM equipped A320s. This is reflected in the values.

Boeing is so good and forward-thinking for these appraiser meetings that it was already promoting the virtues of the 787 before the roll-out of the the first one.

Airbus over the years had been far behind Boeing in briefing the appraisal community. It has gotten better in recent years, but by then the “damage” had been done.

Another element in 737s being valued better than A320s is the difference in Airbus and Boeing philosophy through downturns. Boeing would cut production and lay off thousands of workers. Airbus would maintain production and the worker levels (since laying off didn’t really save Airbus money under European labor laws). Thus, to sell the A320, Airbus often cut prices–or so Boeing told appraisers, and appraisers independently confirmed. This practice led to an over-supply of A320s and depressed values, appraisers concluded.

Finally, one reader asked whether the appraisers had agendas like the rating agencies did during the lead-up to the 2008 corporate bust in which companies like AIG were triple A rated but collapsed anyway.

As with any industry, there are good appraisers, mediocre ones and not so good ones. Back in 1990, when CAR staged that first conference, there was a widespread belief that some firms were “for sale” to their clients. There was one notorious story that illustrates.

Appraisers, in addition to publishing appraisal books and doing specific jobs, also do what is called “desktop appraisals.” This is when someone is buying or selling an airplane and needs a quick idea what an airplane is worth. Appraisers generally don’t like to do these because a good appraisal required understanding the hours and cycles of the aircraft in question and its place in the maintenance cycle from the last heavy maintenance check or to the next one. These are critical components of doing a good appraisal.

Then there is what is called “Base” and “Current Market Value” appraisals. A Base appraisal is defined as the value of an airplane in a stable market with good supply and demand. A CMV appraisal takes into account an inflated or depressed market and whether there is a supply and demand imbalance. There is today’s price and future pricing as far out as 20 years.

The notorious story involved one appraiser who was called by a potential buyer for a desktop appraisal. The buyer was given one figure. Then the potential seller called, as it happened, the same appraiser and a different, higher figure was provided for the same airplane. Within the community, the appraiser’s integrity was a matter of discussion.

On the EETCs, the same appraisers were routinely used all the time because they were known to give the highest appraisals. This did not infer anything untoward–these were, in our view, among the reputable firms. It’s just that their methodologies were among the more generous. We tended to like the conservative appraisers.

Some appraisers lean toward Boeing airplanes for the single-aisle aircraft, but the A319 tends to be better than the 737-700. Most tend to like the A330 better than the 767; and all like the 777 over the A340. They are still feeling their way on the A380 but generally don’t favor the airplane because of limited remarketing potential and low launch customer pricing.

So here is a long-discussion of the appraisal community and how they do their work.

Contrast Mike’s story with this ridiculous analysis. It’s very, very rare that we call out someone else but this one is so far off the wall that we can’t help ourselves. (It should be noted Loren Thompson was paid by Boeing to do a report about the Airbus subsidies and the tanker competition.)

George Talbot of The Mobile Press-Register weighed in with this story.

With the country-rock band Chance McKinney & Crosswire blasting away, the event was festooned with blue-and-white balloons, cupcakes with blue or white frosting, green T-shirts embossed with “Boeing 737 MAX” and a sometimes cheesy, scripted cheer-leading effect from employees, the event marked not only a milestone for the 737 but for Boeing Commercial Airplanes. No aircraft has been produced in such numbers by Boeing.

And more is to come. The production rate is to increase in 2013 to 38 per months and to 42 the following year.

Beverly Wyse, VP and GM of the 737 Program, told the 10,000 Renton employees that the rate could climb to 60 per month someday.

All this means more jobs for Renton and Puget Sound (the greater Seattle area). Renton will be adding 600-700 more jobs in the each of the next two years for the NG production rate increases, Wyse says. It is too early to know how many more jobs will come with a third line for MAX, which doesn’t have a first-flight time until 2016 and an entry-into-service in 4Q13.

Meanwhile, Boeing is processing through weekly orientation days 100-200 every Friday for Puget Sound employment, says Tommy Wilson, Business Relationship guru for IAM 751 at Renton.

We did two stories on the celebration for Flightglobal. Under our agreement with Flight, we have to wait 24 hours after Flight’s publication before we can post those here.

Separately, Aspire Aviation published this long piece, looking at the 787 program and ramp up.

British Airways: Two pilots on a flight from London Heathrow nearly passed out

Kansas: Gov. Sam Brownback unveiled incentives today (Jan. 9) for Bombardier to bring jobs to Wichita, which politicians will view as very positive in the wake of Boeing’s decision to close its defense operations there. Considering Brownback’s stance on Boeing and the air force tanker competition, he continues to diversify Kansas from just Boeing. Wichita is the self-proclaimed “Air Capital of the World,” with presence from Bombardier, Hawker Beechcraft and Airbus. Boeing, of course, was the anchor, having been in Kansas 80 years.

More on tankers: Flightglobal has an interesting piece that 10 years ago, Embraer was prepared to join Airbus Military in the development of the A400M.

The Seattle Times has this article, quoting the Wichita mayor and other officials. The portion of the article that caught our eye is this:

“We thought we had a marriage,” said Wichita Mayor Carl Brewer, who until his 2007 election was a business manager at Spirit AeroSystems, the airplane-manufacturing operation sold off by Boeing two years earlier.

“It’s taken a lot of work for us to control our outrage,” he said. “So don’t ask me… are you outraged, because the answer will be yes, with probably another four-letter word attached to it.”

Kansas politicians feel particularly “angry and disappointed and dismayed,” as one county commissioner put it, because they led the Republican flank of the decadelong congressional push to secure the $35 billion Air Force tanker contract for Boeing.

In return they were told the company and its suppliers would generate 7,500 direct and indirect jobs after Boeing clinched the contract last February.

“We as a community demonstrated our loyalty to the Boeing Company when they asked us to stand behind them and to go fight for them,” Brewer said.

Now he’s singing a different tune. “Don’t think for one second that we are not exploring our opportunities to go out and recruit Airbus… We are making those phone calls.”

Well, that’s going to be a tough sell. During the tanker competition, Kansas politicians, notably then-Sen. Sam Brownback (now governor) and ex-Congressman Todd Tiahrt (a former Boeing employee as well) couldn’t say enough bad things about Airbus is their campaign for Boeing’s tanker. Tiahrt was particularly vitriolic, though Brownback was no shrinking violet, either.

Their comments so offended Airbus and EADS that when Airbus was considering whether to expand its engineering center there, some at EADS not only suggested Airbus do so elsewhere, they suggested closing the center entirely and relocating it somewhere more friendly–like Mobile (AL).

Now that Boeing has made a financial decision to close its defense operations in Wichita, suddenly Airbus is the flavor of the week?

We don’t think Airbus is going to be so quick to forget. Kansas politicians will have a lot of fence-mending to do.

Now-Gov. Brownback wants to recruit Airbus. Good luck. Nothing like insulting someone for years then turning around and asking for favors.

Speaking of tankers, France plans to order the Airbus KC-30, a foregone conclusion. But for all the whining from France about the US decision to buy Boeing, we’ll note that no competition was run in France for this tanker contract, although the Wall Street Journal reports the KC-767 was looked at.